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Thursday, September 30, 2010

These were the words of Vince Cable today, the first minister from the new Coalition Government to speak in the European Parliament. You can read the full text of the speech here.

Vince was talking, among other things, about the Single Market, suggesting that reinvigorating it did not need a 'package deal' to ‘compensate’ people for freer trade – by for example introducing more social legislation. "The pill doesn’t need sweetening, and the sweeteners may also do serious harm," he said.

In the rest of the speech, he pleaded with the EU to revisit the Doha trade talks and urged Europe to wake up to global competition from countries like China and India.

He concluded his speech by stating the Government's position on the proposed hike to next year's EU budget. MEPs, of course, are likely to call for increases above those acceptable to most member states and certainly the cash freeze called for by the UK. Vince said:

At a time when national governments, including mine, are having to make very painful cuts in public spending, no one can understand why the European budget is not being subjected to the same discipline. There is a big backlash on the way, not only in the UK. Can I plead with you to tackle this issue sensibly? Any sense that the European Parliament and Commission are not acutely sensitive to this issue will be seriously damaging.

One has to presume that sending a Lib Dem and not a Tory minister to deliver this message to the European Parliament was not an accident on behalf of the Government. Perhaps the pill did need sweetening after all...

Regular readers of this blog will know that we're not the biggest fans of the former Commissioner for Propaganda Communication, Margot Wallstrom. Margot and her office too often acted like outright lobbyiststrying to promote ever closer union - including spinningfacts on the Lisbon Treaty and trying to silence and slander dissenting voices - rather than civil servants charged with providing factual information (they are funded by taxpayers after all).

But Margot, who now holds a UN position - Special Representative of the Secretary-General of the Secretary-General on Sexual Violence in Conflict - has recently done a rather principled thing. Unlike most of her former colleagues, she turned down the controversial 'transitional allowance' that Commissioners are entitled to for three years after leaving office. We've looked at this issue before, but the transitional allowance is again hitting the headlines, as it emerged that ex-Commissioners such as Charlie McCreevy and Peter Mandelson receive hefty pay-outs from the EU despite holding lucrative jobs or making money from book sales.

The allowance is worth a lot of money - for Margot it would have been up to 60% of her final annual Commission salary for three years, or the difference between her current salary and her salary as a Commissioner (€270,376).

Now, Wallstrom won't starve - having made €2,991,313 during her ten years in Brussels and with an annual pension of €113,486 - but you still have to give her credit for doing the decent thing here (given that she did turn it down for ethical reasons and not, for example, because she makes more than what she did as Commissioner in her new role, which would be a scandal in its own right).

Wednesday, September 29, 2010

An interesting letter in yesterday's FT by Annerose Tashiro of law firm Schultze & Braun in Frankfurt, argued that the eurozone should consider adapting a restructuring plan akin to the US bankruptcy code - the so-called Chapter 9 - which enables American municipalities and cities to default. She argued,

Looking into the framework that Chapter 9 provides, such a municipality would not be under the threat of any sort of liquidation or dissolution. There would also be no estate in the traditional sense and no assets – so no one is suggesting that the Greek school system should be sold off to pay its debts.

Interesting thought. German Finance Minister Wolfgang Schauble has consistently argued for the introduction of some sort of orderly insolvency procedure to deal with a sovereign default within the eurozone, fearing for Greece's in a first instance.

Such a mechanism would have several appealing aspects from a German - and economic - point of view:

- Crucially, it would transfer risks from taxpayers to creditors (where the risks belong). At the moment, German taxpayers are potentially liable for some €120 billion - a crazy amount by all standards. In total, roughly €29 billion has already been dished out to Greece as part of the first rescue package, with Germany being liable for a substantial part of that sum. The rest of the bailout package is theoretical at the moment.

However, should Greece continue to tap the bailout funds, and other countries - such as Ireland, Portugal or, heaven forbid, Spain - follow suit, these bailout fantasy sums would no longer be theory but will become an absolutely massive liability on the Bundesfinanzeministerium's books.

A chaotic default following taxpayer-backed loans would combine the worst of all worlds, and would be a disastrous blow to both the euro and the European Project as a whole. Even if the risk of a eurozone country defaulting was tiny (and it isn't), you can see why German politicians don't want to take this gamble.

- And close to German hearts, an insolvency procedure could encourage fiscal discipline. As a leader in the FT argued last week, "In a union so clearly unable to control the fiscal habits of its member states, the threat of default would be a powerful check on excessive borrowing and irresponsible lending."

- It could allow for Germany to sneak in other changes to eurozone governance, including temporary suspensions of voting rights for countries breaking soon to be toughened up EU budget rules.

Whether a Chapter 9-style mechanism or something else, any concrete proposal for an orderly default procedure is bound to come up against massive political challenges. The elephant in the room is Treaty change. Germany seems inclined to push for changes at the level of all 27 member states, which would require all EU countries to agree. Alternatively, the eurozone could establish such mechanism outside the EU Treaties, which, incidentally, would circumvent Britain.

An insolvency procedure would involve a clear transfer of powers from member states to the EU, as national laws must be brought in line with whatever is established at the European level.

BUT, instead of taxpayers footing the bill for the poor decisions of governments and companies they cannot vote out of office, such an arrangment would mean that ultimate liability will rest with those who actually made the mistakes.

If an insolvency procedure means no more taxpayer funded or ECB-led bailouts of governments - which have no basis in the rule of law in the first place - the net effect would actually be a fairer and more democratic eurozone.

* UPDATE: A leader in today's Handelsblatt makes a convincing case for an insolvency procedure. "Only when investors know their risks, prices can fulfill their role in the market place", it argues, noting that "neither banks nor countries should be 'too big too fail'. It calls for an insolvency procedure to be ready in a couple of years time, as "Greece might default after all".

Tuesday, September 28, 2010

The frontpage of German magazine Focus this week features a picture of ECB President Jean-Claude Trichet - accompanied by the dramatic headline: "This man is risking your money". Equally alarmist, the front page notes that "the interest rate time-bomb is ticking: central banks endanger prosperity".

The magazine asks whether the ECB will become a "bad bank" itself, arguing that its ongoing low interest rates, junk bond purchases and aid to private banks harm savers and investors.

It quotes experts predicting that life insurers will only be able to offer their customers returns of 1.75% next year - far below their 4% target, echoing similar concerns to the Netherlands.

Focus notes that central banks outside the eurozone have also engaged in controversially low interest rate policies (by the way, prompting the Telegraph's Ambrose Evans-Pritchard to call for the US Federal Reserve to be shut down) .

Difference is that there might be democratic support for this kind of policies in America (and the UK) since the logic behind the policy, whether correct or not, is tailored around the specific needs of the US economy and American savers and taxpayers. In Euroland, this is clearly not the case as shared currency complicates national interests and creates a mismatch between economic and monetary policy.

But viewed from Germany, the cobweb of euro trade-offs is becoming increasingly clear: for example, massive exposure to foreign governments' debts and haircuts on pensions/savings vs. the benefits of keeping Greece and others in.

Monday, September 27, 2010

Finance Ministers meet today in Brussels to discuss proposals for strengthening the EU’s “economic governance”, spearheaded by European Council President Herman Van Rompuy and his “task force” on the subject (which so far has failed to convince member states). In parallel with whatever Van Rompuy and the Finance Ministers come up with, the Commission will on Wednesday table its proposals for various measures intended to pre-empt another sovereign debt crisis. These will include sanctions for countries which run unhealthy budget deficits .

According to German daily Die Welt, the Commission is also contemplating the introduction of a “warning system” to monitor wages in member states' public sectors. This is potentially hugely controversial stuff, depending on what the proposal looks like in the end. Marco Buti from the European Commission for Economic and Financial Affairs explains the rationale: "the wage development in the public sector does of course have a great influence on the economy".

Fair enough. However, although it's not entirely clear to us which EU institution will be in charge of deciding when public sector wages are posing a risk to the sustainability of the overall economy under the forthcoming proposal, if Mr. Buti sees the Commission in this role, he might be up against some resistance. Says Buti, "when wages in the public sector damage competitiveness and price stability then the country will be requested [by the Commission] to change this policy."

It has been pointed out many times before – by Dan Hannan in the European Parliament last week for example – but it can never be repeated enough times: the mismatch between what the EU institutions preach on public finances and what they practice is mind-boggling.

If member states had the same pay and pension policies as the EU institutions, we fear that they would go bust in no time.

Europe at 27 is doomed to confusion and failure. It suffers from problems that the Lisbon Treaty has failed to correct. Lack of authority: the 1950s structure, with the [European] Parliament, the Commission and the European Council, being too heavy. We will witness conflicts between the Parliament-Commission duo and the European Council in the future. Lack of realism: the 4 or 5 countries representing the 2/3 or the 3/4 of Europe's population and wealth have indeed special responsibilities. Lack of coherence: the 27 member states have very different social and juridical regimes. We pay the price of an enlargement which was decided too hurriedly.

Thursday, September 23, 2010

The row between the French government and the European Commission over the repatriations of Roma people has reawakened the debate about immigration policies, solidarity and racism. The topic is extremely complex, and some of the main questions could remain unanswered for a long time.

But the recent quarrel has also shown how the French government is guilty of double standards when it comes to respecting "European principles".

As we argue in this letter to European Voicetoday, for years France has lectured other member states on the need for "European solidarity" and to keep up the image of a happy family. However, now that it is accused of violating several key EU laws, the French government suddenly seems much less keen to abide by the principles it used to preach.

But Sarkozy is not the only one who has displayed the symptoms of "EU-hypocrisy" lately. As Dutch MEP Derk-Jan Eppink revealed during the last plenary session of the European Parliament, in 2002 Belgium was condemned by the European Court of Human Rights because, three years before, 74 Roma people had been "collectively expelled" and deported to Slovakia. And guess who the Belgian Prime Minister was at the time? None other than Liberal MEP Guy Verhofstadt (shaking hands with Sarkozy in the picture), the staunchest defender of euro-federalism and "European values".

Indeed, only last week, Verhofstadt was quick to join the rest of the European Parliament in condemning the French policy. He said,

"The reaction from several French government ministers to our criticism is regrettable. This is not a question of political diktat but an appeal to a better sense of judgement based on commonly shared European values for tolerance, non-discrimination and respect for free movement. The Roma are European citizens just like any other."

"Parliament this week was perfectly entitled to point out that bribing or forcing one ethnic group to return, en masse, to another member state, is not in conformity with EU laws, nor in the spirit of the treaties."

It's worth watching the video below right to the end of Eppink's speech. The look on Verhofstadt's face is a picture.

Wednesday, September 22, 2010

Karl Otto Pöhl - former President of the Bundesbank - is quoted in German economic weekly Wirtschaftswoche, making an interesting observation. According to Pöhl, bigger eurozone countries (and most importantly the biggest of them all) should be given greater voting weight within the governing board of the European Central Bank.

He argues:

"It can't be the case that central banks from Malta or Cyprus have as much as a say as the Bundesbank [...] The 'one country, one vote' principle is no longer timely".

Sie sind recht, Herr Pöhl. This makes sense, especially from Germany's point of view. But then why not apply the same reasoning to the UK and the new EU financial authorities, the creation of which MEPs endorsed today in Strasbourg?

Within these supervisors, most decisions will be taken under a 'one country, one vote' arrangement, regardless of the actual size of member states' fianancial markets. As we've pointed out here and here, the UK controls 36% of the EU's wholesale finance market - but will have exactly the same voting weight within the supervisors as all other member states, such as Cyprus or Malta.

Quite irrespective of the merits or the drawbacks of the proposal, that is.

Tuesday, September 21, 2010

It has been labelled in all manner of different terms: "a violent clash", "a virile confrontation", "a furious row". But today's Le Monde finally sheds a little light on what Sarkozy and Barroso told each other during their squabble over the Roma deportations at last week's EU summit.

The paper has published a transcript of the row, under a new headline: "A lunch as bitter as bile in Brussels". Unfortunately for our French-speaking readers, we aren't able to provide a link, as the article is only available to subscribers of Le Monde's website. However, we provide some of the more juicy excerpts below. (Only thing to bear in mind is that the transcript has been put together thanks to the contribution of several witnesses - both direct and indirect - and therefore might not always reflect what was said verbatim.)

With no further comments needed from us, we step aside and leave the stage to the protagonists:

European Council President Herman Van Rompuy: "Nicolas [Sarkozy] has asked me to give him the possibility to make some remarks on a current issue. Indeed, I leave him the floor".

French President Nicolas Sarkozy: "I have the highest respect for the [European] Commission. I have done a lot for it. I have done a lot for the Commission and to bring France back to the heart of Europe [...] It's normal for the Commission to investigate. But before any investigation, one of the Commission's Vice-Presidents [Sarko obviously referring here to Justice Commissioner Viviane Reding] has used expressions like 'disgusting', 'disgrace', 'Second World War'. These are words I can't accept. I don't say that the Commission is disgusting [...] I've come here only because she [Ms. Reding] has apologised. I had told [Commission President] Barroso that I would not come if she didn't apologise".

Commission President Jose Manuel Barroso: "The substance and the form [of Reding's declarations] are two separate issues. We have rules against discrimination, and it's the role of the Commission to defend them [...] The Commission has distanced itself from Viviane's statement. She has said that she regrets the interpretation which has been made of her declarations".

Sarkozy (interrupting Barroso): "The interpretation?! It's not for this that she had to apologise, but for saying that [France's Roma policy] is 'disgusting'".

Barroso (keeping his cool): "I understand Mr. Sarkozy's emotion [...] Ms. Reding has said that she regretted her statement. I note that the French Secretary of State for European affairs has not done the same".

A quick footnote is needed here. French Europe Minister Pierre Lellouche had replied to Viviane Reding saying that according to him the French people were the real guardian of the EU Treaties, rather than the European Commission.

Italian Prime Minister Silvio Berlusconi: "We need to withdraw speaking rights for Commissioners and their staff. Only Barroso must be allowed to speak [in public]".

German Chancellor Angela Merkel: "We need to convey an image of serenity at the end of the summit. We need to avoid using certain expressions".

At this stage, the Cavaliere's interruption and Iron Angie's words of wisdom might have calmed the atmosphere. But not quite. Sarko insists that he wants his counterparts to adopt a common position on the Roma issue, specifying that the Commission has the right to ensure the respect of EU law, but member states have the final word on the measures to address the question. Barroso loses his patience.

Barroso: "These pressures must stop [...] The Commission must be allowed to do its job. Otherwise, we will not have the kind of Europe we want. The European Court of Justice will have the final word".

Sarkozy: "We can't say that the Commission will refer the matter to the Court. There has to be an investigation before. By the way, I have to pay tribute to Jean-Claude Juncker [Prime Minister of Luxembourg, Ms. Reding's home country], who has urged this lady to apologise".

Sarko avoids calling Ms. Reding by name...

Luxembourgish Prime Minister Jean-Claude Juncker (trying to mediate): "Ms. Reding should not have talked the way she did. Nicolas should not exaggerate, though. It's only by chance that she was born in Luxembourg".

Barroso (interrupting Juncker): "But it was you who appointed her [as EU Commissioner representing Luxembourg]. Three times!"

Juncker: "Yes, but at your request..."

Sarkozy: "Let Van Rompuy speak".

Van Rompuy reminds the EU leaders that journalists from all over Europe are waiting outside and proposes to draft some conclusions to settle the matter, at least for the moment. Barroso tries to set his own conditions.

Barroso: "We will not target a specific Commissioner. Otherwise, we will also refer to other people".

French Europe Minister Pierre Lellouche obviously springs to mind...

Sarkozy: "Barroso can't tell us what to say!"

Barroso: "I've the right to express my opinion, because I'm a member of the European Council myself. And I even have a special statute [...] We have done everything to help you with the European Parliament, which is furious on this issue. Let's not turn all this in an institutional quarrel. That would be excessive".

Berlusconi: "We need to silence the Commissioners!"

And the row reportedly terminates here, with Chancellor Merkel suggesting they move on to a different topic.

Monday, September 20, 2010

Among ordinary citizens, one of the most enduring images of the EU is that of the 'gravy train' - MEPs and bureaucrats in Brussels determined to get their hands on as many taxpayer-funded perks as possible. Given the EU's continuing popularity crisis, you would think that the various EU institutions would be all over this issue like a rash.

The Sunday Times yesterday reported that MEPs have demanded that the Commission's 'ethics committee' investigate whether former Commissioner Günter Verheugen is in breach of rules on lobbying. Verheugen, who retired in February, received the Commission’s approval to take up posts with Fleishman-Hillard, a public relations firm, the Royal Bank of Scotland and associations representing German banks and Turkish commodity exchanges.

But apparently he did not seek permission for the European Experience company, of which he is a co-founder, co-owner and unpaid managing director. The company’s website promises clients “expertise and vast experience in the area of EU policy” as well as “the best strategy” to deal with European institutions.

If the claims are true, it would appear that Verheugen is indeed in breach of the Commission's code of conduct, which states:

Whenever Commissioners intend to engage in an occupation during the year after they have ceased to hold office, whether this be at the end of their term or upon resignation, they shall inform the Commission in good time. The Commission shall examine the nature of the planned occupation. If it is related to the content of the portfolio of the Commissioner during his/her full term of office, the Commission shall seek the opinion of an ad hoc ethical committee. (p3)

But the problem is these rules leave far too much room for ambiguity and it is no wonder that cases such as this occur. After all, Verheugen is not the only ex-Commissioner to take up a job which would potentially involve lobbying his former employer. Charlie McCreevy also took up a job, this time at Ryanair, which is clearly open to a conflict of interest given the airline's run-ins with the Commission in competition cases in the past and perhaps the future.

So, let's see the Commission tighten up the rules, perhaps taking inspiration from the UK's ministerial code of conduct, and bar ex-Commissioners for two years from working for any firm that would seek to influence the Commission. It's not like these ex-officials are going to starve to death. Verheugen is in receipt of a pension worth around €115,000 a year.

Thursday, September 16, 2010

With a few exceptions, majorities in the eurozone countries said the euro has been a bad thing for their economy, including France (60%) and Germany (53%), but also Spain (53%) and Portugal (52%). Italians were divided on the benefits of the euro with 47% saying the euro has been good and 48% saying it has been bad for their economy. Only the Dutch (52%) and Slovaks (64%) had majorities saying the euro has been a good thing.

Unsurprisingly, a full 83% in the UK thought that using the euro would be a bad thing for the economy.

But perhaps just as interestingly, the poll found that a plurality of EU respondents (46%) believe that in dealing with the current economic crisis, each country’s national government should have primary responsibility. Roughly two-in-five EU respondents (39%) said that the EU should have primary responsibility for handling the current economic crisis.

Only in Germany did the majority (54%) agree that the EU should have the leading role in economic decision-making. The French were divided on the issue, with 47% saying the national government and 43% saying the EU should have the primary responsibility.

This certainly makes an interesting comparison with the Commission's recent claims that "75% of EU citizens want more European economic governance", based on a rather creative interpretation of its Eurobarometer survey, which we have debunked before. EUobserver notes that the results "sharply contradict" the European Commission's interpretation.

Respondents were only asked whether or not “a stronger coordination of economic and financial policies among all EU member states” would be effective to combat the ongoing crisis (see p. 38 here). The question didn’t even mention the role of the EU or the term “European economic governance”. The Commission got its 75 percent figure by adding up the respondents who thought that stronger coordination would be “very effective” (26 percent) and those who only thought it would be “fairly effective” (49 percent).

Herman Van Rompuy's taskforce clearly has a very difficult job on its hands if it's to convince people on the need for greater economic governance.

Tuesday, September 14, 2010

Over at the Spectator's Coffee House blog, we're taking a look at how the Coalition's referendum lock on further transfers of power to the EU could be given real teeth. The lock, which was announced yesterday, has come under criticism from Tory backbenchers for being too little too late.

However, we argue that if the Coalition takes a strict interpretation of 'transfer of powers', the referendum lock could actually prove significant.

Friday, September 10, 2010

Negotiations over the size and shape of the EU budget post-2013 are just around the corner. Expect no surprises about what the main battlegrounds will be (clue: the CAP and the UK rebate).

UK Chancellor George Osborne has already sent a clear message to his colleagues in the EU.

"We are not going to give way on the rebate, and people had better know that at the beginning of the process, because they'll certainly discover it at the end", he said earlier in the week.

But despite Osbourne's comments, French Budget Minister Francois Baroin (picture) still tried to test the waters during a visit to London yesterday.

"I have made many efforts and put on the table several arguments. But I have understood that the Britons had no intention of changing their stance", he said, adding that during the talks he had also made clear that French President Nicolas Sarkozy's position on the Common Agricultural Policy "is not negotiable".

In other words, we're alooking at a tricky, but painfully familiar, starting position for the budget talks.

Baroin concluded, "at least [...] these talks have shown the determination of both our countries to defend the respective positions". (Hmm, good thing these talks took place then - for a while there we thought that the UK and France would decide not to defend their respective positions...)

But there is a simple solution to this potential deadlock: let's opt for a similar deal to that which Tony Blair struck in 2005, when he infamously gave away £9bn of the UK's rebate in return for vague promises of CAP reform, which amounted to absolutely nothing in the end.

But this time, let's reverse the terms: France and other member states agree to cut the CAP by, say, 50% and repatriate regional spending for member states with a GDP of 90% or more of the EU average (France could actually agree to the latter solution even outside discussions about the UK's rebate and CAP, since the country is now a net contributor).

In return, the UK would promise a "review" or "health check" of its rebate - alongside other member states' rebates - in 2018, with the view to possibly scrapping it altogether.

In an interview with the FT published today, Jean-Claude Trichet makes a pretty extraordinary comment. He seems to deny that the eurozone was ever really in crisis:

"I don’t think that the euro area was close to disaster at all – seen from the inside."

So €750bn eurzone bailout packages, €110bn 'loans' to Greece and the ECB compromising its independence by buying government debt, are just business as usual? Trichet blames the misconception that the euro is in trouble on a lack of understanding:

"Seen from the outside, I would say that it’s always difficult for external observers to judge and analyse correctly the capacity of Europe to face up to exceptional difficulties."

If only Trichet were right. Unfortunately it seems that EU leaders are still unwilling to admit to the fundamental failures of the EMU project - such as huge divergences within the eurozone and monetary union without fiscal union. Tightening budget rules is all very well, for example, but what about a country like Spain that wasn't in breach of them running up to the crisis?

Until the eurozone elite faces up to this fairly simple and fundamental reality, the truth is that it is they that 'don't get it', not us mere 'outsiders'.

Thursday, September 09, 2010

Open Europe published a new briefing earlier this week, looking at the creation of three new EU supervisors to oversee the insurance, banking and securities sectors. The proposal also paves way for the creation of a so-called European Systemic Risk Board - which would be charged with scanning the markets for threats to overall financial stability. On Tuesday, EU finance ministers, including the UK's George Osborne, endorsed the proposal.

The three new EU supervisors would be given binding powers over national regulators in seven different areas, and have the right to interpret, apply and even enforce provisions in over 20 separate directives. So this involves a clear shift in supervisory powers from the national level to the EU.

But putting the power shift aside, from a crude, national interest point of view, will this benefit the UK and the City of London? The short answer is, it could - but that assumes that the UK will stamp its mark on the new supervisory structure (for the long answer - read the full report).

Problem is that relative to its share of the EU's financial markets, the voting system within the supervisors is heavily biased against Britain - most decisions will be taken by a simple majority in the board of the supervisors (consisting of one representative from each member state), which will leave the UK in an unusually weak position to block proposals it disagrees with.

This graph is pretty illustrative:

Irrespective of the merits of the proposal, somehow we doubt that France would sign up to a supervisor with the power to, say, decide the level of farm subsidies by a simple majority vote or that Spain would agree to be part of an EU body which determined fishing quotas by simple majority (both the Multiannual Financial Framework which decides the distribution of farm subsidies, and the Common Fisheries Policy are protected by a veto).

There is a clear need to establish forums for regulators, central bankers and governments to exchange information. The supervisors can also play a useful role in mediating between national supervisors in cases where large cross-border retail banks expose depositors and taxpayers in several different countries to risks.

But the new supervisors will do much more than that - and could well extend their powers incrementally. Interestingly, following the agreement on Tuesday, objections to the new structure did not come from the UK, but from the Czech Republic.

According to the Prague Daily Monitor, Czech Finance Minister Miroslav Kalousek was not entirely happy about being left hanging by his British colleague at the EU meeting. "Great Britain shared our view until yesterday [Monday] and thus has offered an extraordinary show of pragmatism", he said, warning that the new EU supervisors could cause problems in future. He said,

"I have reason to fear that problems may occur sometime in five-six years. One of these [pan-European] agencies will make a wrong decision and will cause harm. This can lead to very complicated discussions about who will pay for it."

Wednesday, September 08, 2010

Open Europe's evening seminar yesterday featured Prof. Dr. Wilhelm Hankel, one of the five German Professors who have challenged the legality of the eurozone bailout at the German Federal Constitutional Court. Please click here to read a more detailed summary and access the audio.

It had all gone a bit quiet on the 'eurozone crisis' front during the summer but this week we have been reminded that it has not gone away. New fears over various banks' exposure to bad debts have led to the ECB again buying Greek, Irish and Portuguese bonds, according to a trader involved in the transactions. Today’s purchases were reportedly for about €10 million ($12.7 million) each. (One of the three grounds on which the five German professors consider the bailout illegal is the ECB’s decision to intervene directly in the crisis by buying government bonds from weaker eurozone countries.)

One of the many interesting remarks made by Professor Hankel last night was that the “ammunition” of the multi-billion eurozone rescue packages “may not be sufficient” to bail out the eurozone in the long-term. These bailuots are essentially a political sticking plaster to paper the cracks in the economic architecture of monetary union. “Economic laws will always triumph over political power, at least in the long term”, he added, quoting Eugen von Böhm-Bawerk – one of the founding fathers of the Austrian school of economics.

Friday, September 03, 2010

Last week, three associations of Dutch pension funds' issued a quite startling warning to the Dutch Parliament: "If interest rates remain so low" they said "the the entire pensions system will be undermined”, adding that insurers could take a serious hit as well.

Thing is, Dutch pension funds are stuck in a tricky dilemma: they're promising their savers annual returns of 3.75 percent or more, but long term interest rates are substantially lower than that (down to 2.13 percent in Germany).

This has led to a big uproar in the Netherlands, as it emerged that as many as fourteen Dutch pension funds could be forced to backtrack on their obligations - for the first time ever. This, in turn, would result in a 14 percent loss for some 150,000 Dutch pensioners. The Dutch pension system is very much designed around a large number of private pension funds, which traditionally have yielded good returns for Dutch citizens - so the pain would be felt.

The Dutch National Bank, effectively working under the ECB, argued that the pension funds had themselves to blame for the problems. But Albert Roëll of Kas Bank blamed the situation on the continued low interest rates and the cheap money the ECB has distributed to banks, in the wake of the sovereign debt crisis in the eurozone.

The Dutch government has now rejected demands from the pension funds to relax capital standards (which they argue would be one of the few ways to address the problems. Adjusting interes rates could have been another, if the Netherlands hadn't given up its control over interest rate policy) .

So what do we see?

- The Dutch pension system, which is world famous for its large share of private pensions, is coming under strain because of the ECB's low interest rates. These rates are in many ways now intended to serve struggling periphery economies in the eurozone and big banks who did unwise investments in these same economies.

- In turn, Dutch pension funds are forced to take on more risks (holding less capital) in order to cope with these strains. The alternative is to cut returns, meaning less money for the country's pensioners.

- Another example of the problems with a one-size-fits all monetary policy in an area with such diverging economies as the eurozone.

Wednesday, September 01, 2010

Tony Blair’s memoirs, released earlier today, reveal that while Bush junior was in the White House he, like many others, found the EU hard to get his head around. The Telegraph reports that in a 2001 G8 summit in Genoa, Bush was confused by the presence of Guy Verhofstadt: